Buying: When is it the right time for me?

Distinct benefits exist for both renting and buying, to help you begin the process of understanding which one works best for you, we’ve put together a summary of the pros and cons of each.

The Benefits of Renting

First-time home buyers are renting for longer than ever—and home ownership is at 63%, a 48-year low. Economic, social, and demographic trends have forced people to continue renting, when they may otherwise wish to be buying. Other factors may exist such as lacking cash for a down payment, trying pay down college loans or repairing credit.

Renting is good when you’re young and (relatively) broke. If you’re not ready to buy, or until you’re ready, renting is also the simpler option. You can move easily, share a place with friends to keep the rent down, depending on your roommate tolerance level. It involves less commitment, freedom to relocate, and fewer upfront costs.

The Costs of Owning

Contrasting the price of renting versus owning can be difficult. With renting, the costs are limited to monthly rent, security deposit, and utilities such as gas, electric, and heat.

The costs of owning are more complicated and less predictable. You have additional responsibility for replacing appliances, making repairs, and renovations. This can majorly impact the investment an owner makes into the home, and it depends partly on luck. Knowing what properties are worth based on location and what shape they’re in is crucial when you’re buying. If you get a fixer upper, you still need cash on hand to, you know, fix things up.

Also, tying up your money in real estate means that you don’t have that money to invest in other markets. Non-rental real estate does not usually have the same level of return as more liquid investments.

It’s a cliché that renting is throwing money away, because you’re not building equity as you pay the monthly fee to live somewhere. This is only partly true. When you first start making mortgage payments, over half of the monthly bill is not be going to paying off the principal, but rather to taxes, interest, and insurance. It’s similar to paying off a loan or credit card balance, in which you pay the interest first. The principal doesn’t decrease for a while when you are making your minimum payments.

So, although ownership gradually allows you to gain equity in the home, this process is slow for the first few years.

Moreover, the process of buying can seem overwhelming to even the most enthusiastic potential homeowner: finding the right property, owing $100K+ to the bank, the potential repair and upkeep costs, more confusing taxes… all these stand as barriers to entry.

The Benefits of Buying

And that’s good, because to take on a house of your own, you must be willing take on more responsibility. Renting combines freedom with a lack of responsibility, something we set at a high value in our youth.

In the same way we want that freedom in our 20s, we want to look to settle a bit more in our 30s. We want to build a home, maybe have a family. The responsibility that comes with ownership creates a psychological “buy-in” that renting will never have. Kind of like marriage. But that’s a different story for a different day.

Back to the previous example—the one on how you don’t build equity in a house right away. This is true, but you do start building equity in a home eventually, and the more you put towards a down payment, and any extra payments you can make, help you gain equity in the property and avoid extra fees (such as mortgage insurance, which you have to pay if you do not put 20% down on a home).

While renting is easier, many who don’t buy eventually find themselves priced out of their neighborhoods as rents rise. The psychological cost of renting compounds over time, while the benefit of owning also increases.

It is common for people to say, “I wish I’d have bought way back when…and now I can’t afford anything!” In Chicago alone we’ve heard this comment about Lincoln Park, Wicker Park, Ukrainian Village, Old Town, and River North and West, to name a few.

“There’s always neighborhoods like that, if you know where to look! Let’s face it—real estate is an investment, and every investment has its cycles. There are times when renting is better, and there are times when buying is better.” – Truepad Trusted Agent, Michael Gerhardt.

“What we’re seeing now is an extended buying cycle created by the fallout from the bad mortgages of 2006 to 2008. We’re going to be riding that for a while, so if you look at the good areas, like Lake View and Lincoln Park, Gold Coast, there’s not much new construction, which means that existing home prices have to go up if there’s a demand for them, and right now there is strong demand for property.”

Interest rates are still low, but they will not stay that way for ever.

“The people who sit by the sidelines and decide not to buy, they may fall by the wayside, they might not be able to buy something down the line,” Gerhardt said.

As you pay more in rent, it starts to feel more like running in place. People generally tend not to anticipate future changes in their lives, but you may feel this sense of frustration your future self might experience as this unfolds.

The Benefits of Owning

People want to own a home for various reasons—establishing a home for family, as an investment, a foothold in the community, and even just to feel more like (i.e. become) a grownup. Fewer people are engaging in “flipping” houses than in the run-up to the housing bubble—that trend peaked in 2006—so though having an investment in the economy is still a powerful reason for people to buy, it’s more realistic to think of a house as a medium- or long-term investment.

Many younger people don’t feel like they can afford homes, or are skittish about the market, yet they still aspire to, as part of their progression through life.

In a perfect world, you can afford the home you love and it becomes a home for yourself and your family. After many happy years, you make a modest return when ready to sell. If we were only interested in a return on investment, the stock market grows faster than the value of real estate, which keeps closer pace with inflation. When real estate prices rise drastically, the few who sell during the uptick are winners, but as we saw in the 2008 bursting of the bubble in the housing market, many more end up in underwater in their mortgages. The American middle class has lost tremendous wealth through this period.

We are in a period of relative sobriety, now, and prices are more reflective of the real economy. But this trend shows us that it is important to make the home purchase meaningful—it should be about more than just making a buck.

The best arguments for buying a place are less obvious than those of renting, and that’s because often they are personal. We may go even further and say that they are largely symbolic.

Hang on, pragmatists. That is not to say that the benefits of home ownership are less real. We are in the business of real estate, after all, and we have an interest in people buying condos and houses. However, we do acknowledge renting is a strong solution for the basic problem of where to live.

But when we talk to happy homeowners, often the reasons they bought are not about money or investment, tax breaks or rental markets, but about overall life satisfaction and the sense of belonging to something. In this commitment-averse world, there’s something gratifying about making a decision to stay put, to be responsible for someone or something, to make a house into a home.

Of course, you’re not about to buy a theoretical house in a theoretical neighborhood. This is Chicago, after all, and the housing market has settled down some since the boozy highs of the late 00’s. After a period of historic lows and instability, prices have been steadily rising over the last few years, and have begun to stabilize. “Those short sales and foreclosures are all gone from the market in the neighborhoods along the lake,” Gerhardt said. “There’s a normal rise in prices now, nothing drastic like it was before, so I think prices will continue with a normal, healthy rise, around 3 to 5 percent a year,” he said.

It’s still definitely a buyer’s market, but as Michael Gerhardt said, and with low inventory in good areas, the best properties are getting multiple offers. It may take some time to find the right place and get the deal.

In the meantime, it makes sense to start looking around, figure out what neighborhoods you’d like to look at, as well as getting pre-approved for a mortgage. You can start by using a mortgage calculator online to see what you can afford.

And rents are showing no signs of slowing down. “If you look in most of the great areas, Uptown, Lake View, Lincoln Park, the rents are going up. There’s a lot of demand for them and not a lot of supply—because of that, it’s expensive. And there’s a constant pipeline of young professionals from nearby colleges willing to pay the price to live there.”

The buy-in

Creating a home may be the main reason for buying, and the challenges of buying and owning a home are certainly greater than renting. But challenges are also opportunities.

If you’ve thought through the costs and feel confident taking on more responsibility, buying may be the smartest thing you do now and your later self will thank you.

Emily Johnson

Emily Johnson is a writer, researcher, editor, and publishing consultant with a decade of learning in the field. For Truepad she covers real estate trends and develops knowledge base articles that help people learn about the process of buying as they’re looking for a home. She went through the process herself two years ago and is a proud homeowner in Logan Square.

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